The Taxation of Imports: An Outdated Threat to Assert Itself on the International Scene?

Alice Pirlot argues that – rather than being outmoded – border taxes are a useful political instrument in the attainment of economic, social and environmental goals.

“Currently, when we ship products out of America, many other countries make us pay very high tariffs and taxes — but when foreign companies ship their products into America, we charge them almost nothing.”

Some weeks ago, I asked myself whether I should express my thanks to Donald Trump. This may seem an odd thought: the US President, while campaigning last year, has called Belgium – the country where I was born and where I currently live – ‘a hellhole’ and then a ‘beautiful city’. Yet, I felt excited when he introduced his ideas to reform US tax policy. Among his proposals, Donald Trump recommends adopting ‘import taxes’ on Mexican products and ‘border tax adjustments’ (BTAs) on imported products.

You may be wondering why a topic related to taxes would make me enthusiastic. The reason is that the 45th President of the US is drawing some new attention to border taxes, a topic which has – for a long time – been considered an outdated topic while I am convinced of the opposite. Border taxes are an up-to-date political instrument, which may help to promote various political objectives, including economic, social and environmental goals.

By introducing his plan for tax reform, Donald Trump stimulates the
discussion on a topic that I consider important.

Donald Trump has not elaborated much on the design of his tax plan. It is nevertheless interesting to note that he proposes to establish different types of ‘taxes at the border’, exploiting – though not always adequately – the various possibilities to tax imports under international trade law. On the one hand, the President proposes to reinforce the traditional taxes that are imposed on imports, following the international trade logic of customs duties (also called tariffs). On the other hand, he calls for the adoption of a border adjustments tax (traditionally called BTAs), a special type of border tax which is more flexible than tariffs. The distinction between tariffs and BTAs is essential under international trade law. Under the General Agreement on Tariff and Trade, WTO Members are only allowed to adopt tariffs under the condition that they do not exceed the levels mentioned in their schedule of concessions. In contrast, WTO Members are free to adopt BTAs on imports – with no fixed limits on the level of the tax rate – under the condition that the tax burden on imported products does not exceed the tax borne by like domestic products. From this perspective, Trump’s proposals highlight that the design of border taxes may take different legal forms.

The proposals of the President to establish BTAs reflects the historical debate on the topic. For more than 50 years, the US expressed strong criticism on the WTO law provisions surrounding BTAs. In the 1960s-1970s, the US indeed claimed that WTO law provisions surrounding such taxes were benefitting, unduly, European countries, the tax system of which more significantly relied on indirect taxes subject to adjustments. Consumption taxes in the European Union are indeed a concrete example of BTAs: domestic and like imported products are subject to the tax where exported products are exempted. The current debate in the US surrounding BTAs – including the questions as to whether Donald Trump would support the Ryan-Brady proposal to establish border adjustments in respect of a new cash flow tax – is to be understood against this background.[2] For years, proposals have been introduced, unsuccessfully, in the House of Representatives to reform the US (corporate) tax system so as to compensate for the supposed advantages from which other countries, and in particular European countries, would benefit thanks to BTAs (e.g. H.R. 2600 & H.R. 2666). Such proposals have, so far, been unsuccessful. They were also likely to be contrary to the current interpretation of WTO law surrounding BTAs. From this perspective, the US discussion on BTAs and proposals of tax reform are neither new nor original. If the President decides to implement such proposals, it may nevertheless seriously put into question WTO law provisions on BTAs. This could even lead to a ‘trade war’ if third countries decide to retaliate against US measures. This is obviously not the reason why Trump’s proposals make me enthusiastic.

Regardless of the motivations of the presidential plan for tax reform, the fact Mr. Trump discusses BTAs as an integral part of his tax policy attracts a renewed attention to the topic, which is likely to move higher on the political agendas, not only in the US but also in other countries, highlighting the diversity of objectives that may be pursued through such taxes. Mid-February, Lakshmi Mittal – chairman of ArcelorMittal – expressed his preference for the adoption of carbon border taxes.[3] Similarly, a recent advocacy paper from the Climate Leadership Council – an international research and advocacy organization -, authored by prominent figures, among which former US Secretaries of State and of the Treasury, presented a ‘carbon dividends plan’ for a ‘conservative climate solution’. This plan calls for the adoption of a ‘gradually increasing carbon tax’ in addition to ‘border carbon adjustments’.[4] Such ideas are not new. Economic and legal scholars have studied the possibility to use the mechanism of BTAs to pursue environmental goals. For example, Laurent & Le Cacheux have proposed to adopt a carbon added tax (‘CAT’).[5] So far, such proposals have not yet been translated into practice.

The call of Mittal in favour of carbon border taxes – some weeks after Trump’s proposals – may not be a coincidence. Although Donald Trump does not seem to be keen on implementing new environmental policies, his border tax proposals could eventually encourage the adoption of taxes promoting environmental protection on a global scale. This certainly explains my enthusiasm when I read his recent tax proposals.

Alice Pirlot is FNRS Postdoctoral Research Fellow at the Université Catholique de Louvain, Belgium.